ESG+ Newsletter – 21st July 2022

Has ESG sentiment turned a corner?

There has been plenty of discussion of late around how ESG may fare in a bear market, with some arguing that a second successive quarter of outflows represents the beginning of the end for ESG.

As reported in the Financial Times though, new data has emerged that interest in European ESG exchange traded funds has, to date, held up better than non-ESG equivalents. Despite the widely publicised negative sentiment, the article cites Morningstar in contextualising the lower inflows by comparing them to the European ETF market generally, which fell by more.

The research, also covered by Reuters, went on to note the direction of travel in the U.S, with funds labelled as ESG attracting $528 million in net new deposits in June, after shedding $3.2 billion in May. Although U.S equity funds in general were also in the black, the reversal in the US market where ESG is seen as lagging Europe, may be a sign that investors are getting to grips with the headwinds presented by the Ukraine war and further macroeconomic uncertainties. Perhaps this research underscores the assertion made in an article recently covered by this newsletter that firms with ‘ambitious’ transition plans are ‘more resilient’ to stock market drops.

Just Transition label in development for financial products

The Impact Investing Institute has launched a Just Transition Finance Challenge to encourage the flow of capital into investments that support a just transition. Financial institutions with more than £3.6tn of assets have already pledged to join the challenge. The founding participants will work to develop a set of criteria to underpin a new just transition label. The new label will be used for products that deliver the three elements that contribute to a just transition – advancing climate and environmental action, improving socio-economic distribution and equity, and increasing community voice. All three of these elements will be required for an investment product to qualify for the new just transition label. The world of ESG investing can sometimes lack clarity on its impact; however, this just transition label has the potential to shine a light on the investments contributing to the climate transition in a meaningful way while taking steps to bring society along in implementing the changes.

Nuclear bonds in; airports and fisheries out

One of the most publicised aspects of the debate over the EU’s Taxonomy was the inclusion of nuclear and gas – in certain forms – in the final framework. While that debate rages on, Responsible Investor reports on the International Capital Markets Association’s (ICMA) estimates that nuclear projects could eventually account for over 10% of the green bond market. As of yet, this area of the green bond market is underdeveloped, with only one nuclear green bond – from Bruce Power – currently in issue; however, last week, EDF in France updated its green financing framework to align with the EU Taxonomy, thereby extending the scope of potential investments to include nuclear power. Further, Canada’s Ontario Power Generation issued a C$300 million bond as part of refurbishing its Darlington power station which is reportedly experiencing high demand.

According to Environmental Finance, the Climate Bonds Initiative (CBI) announced tighter green bond requirements earlier this month. The updates include explicit exclusions of airport terminals and sustainable fisheries from green bond classification, with the initiative pointing to the absence of any plans for aviation to decarbonise and questions over the overall sustainability of fish farming. Much like other areas of ESG and sustainability, financing continues to try and differentiate between different shades of green.

UK creates taskforce as investors struggle to measure ‘S’ performance

As we have covered in the last two edition of the newsletter, investors are placing an increased focus on ‘S’ issues and have become more willing to engage with companies on these matters. Despite this focus, ongoing difficulties remain in assessing and integrating ‘S’ factors into investment analysis.

Market regulators require companies to disclose data around its workforce and compensation levels and ESG rating agencies require engagement across a spectrum of ‘S’ factors that could impact financial risks and opportunities. However, as highlighted in a recent Reuters article, investors still rely heavily on engaging with executives at companies to gain insight and information into companies ‘S’ policies. While direct engagement has been proven to be popular and successful, regulators are aware of the issues facing investors and are looking at proactive initiatives to help support them to integrate social factors into investment decisions. This week, the UK Pensions Minister, Guy Opperman, announced a new taskforce to help trustees monitor data and international reporting developments pertaining to the ‘S’ in ESG. Social issues remain complex and rapidly evolving, and we wait to see whether an insightful methodology for measuring social impact can be created and used to inform investment decisions.

Biden eyes climate emergency declaration as Democrats Demand Swift Action

US President Joe Biden is considering declaring a national climate emergency, despite a generally stalled environmental agenda. Biden was called to speak on Wednesday as wildfires increase across the US and record-breaking heat waves descend globally. The declaration’s goal would be to support the US effort to reduce carbon emissions, but the recent Supreme Court Ruling against regulating high emitter power plants does not bode well for any change the Biden administration wishes to enact. West Virginia Senator, Joe Manchin, raised extensive concerns about the administration’s spending, and has already pushed back against the parties larger Climate Bills. Manchin, a democrat, has raised concerns about spending due to high inflation and economic indicators pointing him away from agreeing with some of the large bills others in his party want to cast.  The declaration aims to give the White House the ability to cut oil exports, limit drilling, and boost renewable energy.

If Biden wishes to achieve the goals of his Build Back Better plan, or appease supporters on climate efforts, making a swift climate declaration will only be the start.

Australia’s environment in a state of decline

A recent report revealed Australia’s environment is in a state of decline and faces intensifying threats. The survey of Australia’s ecological systems is conducted every five years and exposed the concerning changes. The changes are attributed to climate change, habitat loss, invasive species, pollution and mining. Over and above this, the threats are not being adequately managed, meaning further decline is on the cards. In recent years, Australia has been subjected to severe drought, bushfires, record breaking floods and six mass extinction events on the Great Barrier Reef. Government spending on biodiversity has also declined as the risks have increased. The report revealed the following additional findings:

• Nineteen ecosystems are on the brink of collapse
• There are now more non-native plant species in Australia than native ones
• Australia has lost more species to extinction than any other continent

This report highlights the concerning rate of global biodiversity loss, and the importance of a global agreement being reached at COP 15 in Montreal in December.

In Case You Missed It

• The creation of 3D vector maps across the top 100 Canadian cities intends to support national sustainability initiatives. It is hoped that the maps will assist development of net zero targets, providing useful insight into policy and funding programmes, and ultimately supporting goals to achieve net zero emissions by 2050.
• The Financial Conduct Authority (FCA) has announced an extension of their ESG disclosure requirements. Originally intended to be introduced in autumn 2022, the FCA’s sustainability disclosure requirements have been pushed back to account for developments in international ESG standards. The FCA’s rules will aim to improve reporting transparency to help consolidate the sustainable investment landscape and reduce the risk of greenwashing.
• The High Court has ruled that the UK government’s net zero strategy is insufficient. Following pressure from environmental and legal campaign groups, the High Court concluded that the strategy lacked quantifiable targets and qualitative policy details to account for the current 5% shortfall in recent carbon budgets to meet the goal. Resultingly, the BEIS is now required to publish a more detailed plan by March 2023 which outlines timescales and sector specific climate policies.

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